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Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-1
Slides prepared by Mya Aronfeld
 Chapter 1
Budgeting fundamentals

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-2
Slides prepared by Mya Aronfeld
Budgeting fundamentals

 Budgeting is the process used to develop:

 A formal written statement

 Of managements plans for the future

 Expressed in financial terms

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-3
Slides prepared by Mya Aronfeld
Types of plans

 Long term: 5 to 10 years

 Medium term: 1 to 5 years

 Short term: up to 1 year

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-4
Slides prepared by Mya Aronfeld
The planning cycle
Budgets are the mechanism by which
management control of an organisation
becomes possible.
Budgets Performance

Plan Action Results

Revise Remedy

Comparison of actual results to budget variance

Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-5
Slides prepared by Mya Aronfeld
Benefits of budgets

1. Forces managers to do planning.

2. Realistic performance targets.
3. Basis for controlling what happens within the
organisation.
4. Helps coordinate the activities of the various
centres that make up the business.
5. Communication – managers exchange
information on ideas, etc.
6. Motivating tool – if the process involves
staff.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-6
Slides prepared by Mya Aronfeld
Limitations of budgets
 Only estimates, not statements of facts.
 No substitute for sound management
practices.
 Need to be amended if circumstances
change.
 Preparation does not guarantee success.
 Aspects of people’s behaviour may
undermine the value of the process.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-7
Slides prepared by Mya Aronfeld
Budget classification

 Static (fixed) budgets: prepared for one

level of activity, usually around the
forecasts made for sales.

 Flexible budgets: a series of fixed budgets

set to different levels of sales activity within
which the organisation may operate.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-8
Slides prepared by Mya Aronfeld
Cost/volume relationships

 Fixed costs: in total remain the same

for a period of time and over a particular
range of activity.

 Variable costs: in total tend to change

as the level of activity changes.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-9
Slides prepared by Mya Aronfeld
Budget processes
 Zero-based budgeting: sets the initial
figures for each activity to zero.

 Period budgets: developed for a specific

period of time, e.g. a month.

 Rolling (continuous) budgets: are

continually updated by periodically adding a
new incremental time period and dropping
the period just completed.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-10
Slides prepared by Mya Aronfeld
Types of budgets
 Revenue budgets: estimates of the income
of an organisation from the sale of goods
and/or provision of services for a specific
period.
 Operating budgets: estimate activities that
will affect profit.
 Budgeted financial statements: show the
estimated results and projected financial
position of a business. That is budgeted
revenue, balance sheet and statement of
cash flows.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-11
Slides prepared by Mya Aronfeld
Master budget

A combination of all the budgets of an

organisation.

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-12
Slides prepared by Mya Aronfeld
 Master budget
Merchandising Professional Manufacturing
firm services firm
Sales budget Fees or fees & Sales budget
sales budget
Purchases Professional & Cost of
budget support labour production
budget budget
Cost of goods Cost of supplies Cost of goods
sold budget used sold budget
Other operating Other operating Other operating
expense budgets expense budgets expense budgets

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-13
Slides prepared by Mya Aronfeld
Master budget

 Irrespective of the type of organisation, the

following budgets will be part of the master
budget:
 Statement of financial performance
[revenue budget]
 Statement of financial position [balance
sheet]
 Statement of cash flow

Copyright  2003 McGraw-Hill Australia Pty Ltd

PPTs t/a Budgeting, second edition, by Banks & Giliberti
1-14
Slides prepared by Mya Aronfeld